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Should You Convert? Comments


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What's the big mystery around Roth IRA conversions this year?

Not only were the income caps lifted this year—a big deal for those with a modified adjusted gross income of more than $100,000—if you convert to a Roth by December 31, 2010, you don't have to pay the conversion taxes right away.

How does a Roth conversion work, and why should you care?

With a Roth IRA, you can't deduct your contributions as you can with a traditional IRA. But the money grows tax-free—"and you don't have to pay any tax upon withdrawal in retirement," notes this clear-cut article on Bankrate.com.

Converting means that your tax bill could be much smaller than if you left the cash in a traditional IRA or 401k for many years, and ended up paying tax at a higher rate in retirement.

Until now, many folks haven't been able to convert because their incomes were too high: above $100,000 MAGI.

Starting this year, anyone can do a Roth conversion, regardless of income.

Naturally, you have to pay taxes on the conversion (Roths allow only after-tax dollars). But there's another perk: if you convert by Dec. 31, 2010, you can spread out the tax bill through 2012.

It's complicated, but if you run the numbers—or consult with a financial planner—this investment move might save you quite a bit down the line.

Not sure what a Roth is? Check out previous DailyWorth posts about IRAs:  

 

Doing The Math on a Roth IRA

Helping Ashley Start Her IRA    

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